Decentralized exchanges (DEXes) can genuinely be called trustless, as this is the best way to characterize their main distinction from the centralized currency and trading exchanges. To trade on a DEX, you don’t need to “trust” the exchange to perform transactions. DEXes work “without trust” – you may not know who is behind them, since DEXes work automatically. They are, in essence, a smart contract. A smart contract cannot fail to follow the instructions given to it – this is the definition of a system that functions without trust between the two parties.
Centralized exchanges (CEXes) generate orderbooks (price quotes for purchases and sales) to conduct trade, and systems of users’ accounts to identify buyers and sellers. The digital assets deposited on CEXes are mixed in with the general pool and stored in an unknown location. Users cannot monitor where their coins are and what is happening with them at any given time.
Such non-transparency in asset management is the main problem of CEXes and the reason for all the “technical failures,” “software errors,” and other incidents leading to the loss of traders’ funds. All funds deposited on CEXes are fully controlled by the exchange operators, who can use them however they want at any moment. Therefore, if you want to trade on a centralized exchange, you are just forced to trust it and hope that it will fulfill your order.
As mentioned above, you don’t need to trust a decentralized exchange, since it doesn’t have any register of users’ accounts, and traders use their own non-custodial digital wallets to initiate and approve their transactions on-chain (i.e. on the blockchain). These transactions take place and are validated in real time, are approved only within the limits of a certain sum, and the user signs every action – all of which lends multiple levels of control over what is happening. Compared to CEXes, where all transactions are conducted “under the hood” of the exchange, off-chain (i.e. without using a blockchain), DEXes offer traders unparalleled transparency.
Only the users themselves have access to their non-custodial wallets on a DEX. This ensures complete asset security which, by definition, is unattainable on the centralized exchanges.
